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Pound sterling is set for its best weekly performance of the year against the dollar, helped by a soft U.S. inflation print.
On the surface, a 0.9% month-on-month rise in U.S. inflation is anything but soft: it's a steamer of a print and reflects the surge in energy prices from the Iran war.
But looking beneath the headlines shows inflation consistent with a slowing economy: core inflation rose by a modest 0.2% monthly and 2.6% annually.
"Gasoline price hikes prompted a jump in headline inflation, but core pressures were more benign than feared," says James Knightley, Chief International Economist for the U.S. at ING Bank.
The core inflation data says the inflation that economic activity and demand generate is stabilising at a much lower pace.
And that matters for the Federal Reserve, it will judge that it can do nothing about fuel prices and that raising interest rates would only soften the underlying economy even more. It lessens the odds of rate hikes in the future and keeps alive hopes for cuts in the future.
That weighs on U.S. interest rate-linked products and, of course, the dollar.
The pound to dollar exchange rate rises to 1.3471, taking the weekly gain to 2.0%, the largest since March 2025. Those with currency payments are therefore facing excellent levels and should benchmark their bank's transfer costs to ensure they are maximising the dollar amount they will receive.
The strength of the day's advance suggests there could be more follow-through gains for GBP/USD next week, particularly if attention on the Iran war continues to wane. However, the war remains live and there is some technical resistance that needs to be crossed on the weekly chart:
"Despite these energy concerns, broader financial markets are reacting with surprising optimism. Investors were heavily positioned for a hotter report, yet the bond market response remains quite muted, with two-year Treasury yields ticking down only slightly today," says Kevin Ford at Convera.
Despite a poor showing by the dollar this week, analysts at Citi say the situation in Iran remains far too opaque to generate a meaningful GBP recovery.
"It might be too early to buy USD dips given 'cash on the sidelines' willing to chase current price action and scope for FX pairs to retrace towards pre-conflict levels. But we see a low bar for tensions to re-emerge and our assessment of the macro backdrop is still one with a stagflationary tilt," says Citi in a weekly FX update.
"Owning USD is attractive into such a backdrop, in our view," it adds.